ANKARA, Jan 28 Turkey's central bank governor
raised expectations for an emergency interest rate hike on
Tuesday, denying he was hostage to political pressures and
vowing decisive action to fight rising inflation and a tumbling
lira.

Erdem Basci said the bank would not hesitate to tighten
monetary policy in a "lasting way" if needed and asserted the
bank's independence amid investor concern that it has shied away
from rate hikes under pressure from the government.

He also ruled out any imposition of capital controls, saying
such moves were "not in our dictionary."

Prime Minister Tayyip Erdogan, keen to maintain economic
growth ahead of an election cycle starting in two months, has
been a vociferous opponent of the higher borrowing costs
sometimes needed to bolster currencies, railing against what he
describes as an 'interest rate lobby' of speculators seeking to
stifle growth and undermine the economy.

That has left the central bank struggling to contain the
lira's precipitous slide. Investor confidence has been damaged
by a corruption scandal shaking the government, fears about a
power struggle and the global impact of a cut in U.S. monetary
stimulus.

"Nobody should have any hesitation that the central bank
will use all available tools. The bank will not hesitate to take
steps to make lasting tightening in monetary policy if deemed
necessary," he said.

The lira firmed on his comments to 2.2601
against the dollar from 2.3120 late on Monday, having touched a
record low of 2.3900 on Monday morning.

The cost of insuring Turkish debt meanwhile eased from
Monday's 19-month highs, according to data from Markit.

The bank sharply raised its inflation forecast for the end
of the year to 6.6 percent, heightening market expectations that
it will hike rates at its first extraordinary monetary policy
meeting since August 2011, the height of the euro zone crisis.

It is expected to raise its lending rate - the cost of its
overnight loans to Turkish lenders - by 225 basis points to 10
percent, according to the median forecast in a Reuters poll of
31 economists taken on Monday.

The bank will announce the outcome of the meeting at
midnight locally (2200 GMT).

WILL IT BE ENOUGH?

Erdogan congratulated the central bank last week after it
left interest rates on hold, despite the lira's precipitous
decline, while his new economy minister came out a day before
the meeting saying the bank should not hike.

"Stand firm, don't raise," the pro-government Yeni Safak
newspaper said in its main front page headline on Tuesday,
alongside a picture of Basci.

"The interest rate lobby based in London and New York
virtually blackmailed the central bank yesterday, pushing the
lira has high as 2.39 against the dollar," the paper said.

Thirty respondents in the Reuters poll, a wide sample of
Turkish and international banks, forecast a rate hike, with
estimates ranging from a rise of 125 basis points to 425. Only
one forecast the bank would leave rates unchanged.

There was less consensus over whether such a move would be
enough to stabilise the lira and tame inflation, with 12
economists saying yes and seven saying no, citing the need for
structural reforms and political stability.

The graft scandal, which triggered the resignation of three
ministers and detention of businessmen close to Erdogan, has
grown into one of the biggest challenges of his 11 years at the
helm.

His reaction, purging the police force of thousands of
officers and seeking tighter government control over courts, has
been criticised by the European Union and raised investor
concern over the rule of law and independence of state
institutions.

Reluctant up to now to make an outright rate hike, the
central bank has struggled to defend the lira instead by burning
through its forex reserves and trying to squeeze up borrowing
costs on the margins - a battle it has clearly been losing.

The bank raised its mid-point forecast for year-end
inflation to 6.6 percent from a previous forecast of 5.3
percent, well above its target rate of 5 percent.

Basci said inflation would slow from the second half of 2014
and forecast the 2015 inflation mid-point at 5 percent.

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